Rite Aid buys other drugstores

U.S. Eckerd and Brooks operations purchased in $2.55 billion agreement.

BY MARC LEVYTHE ASSOCIATED PRESS

Published: Friday, August 25, 2006 at 6:30 a.m.

Last Modified: Friday, August 25, 2006 at 12:00 a.m.

HARRISBURG, Pa. - In a bold step to keep pace with the industry leaders, the nation's third largest drugstore chain, Rite Aid Corp., said Thursday it will purchase the U.S. Eckerd and Brooks operations of Canada's Jean Coutu Group Inc. for about $2.55 billion in cash and stock.
Rite Aid's first major acquisition since a turnaround team arrived to bring the company back from the brink of bankruptcy six years ago was designed to help it compete better with its bigger rivals Walgreen and CVS.
At the same time, Rite Aid said the deal will make it the largest drugstore chain operator on the East Coast and give it a larger presence in major cities such as Atlanta Philadelphia, New York and Baltimore.
"It accelerates so quickly our growth strategy," Rite Aid's president and CEO Mary Sammons said in a telephone interview. "These are good stores in good locations. . . . In terms of getting into the neighborhood, being where the customer is, you really want to have the scale that our leaders in the drugstore channel have."
Rite Aid will pay $1.45 billion in cash and 250 million shares valued at about $1.1 billion. The shares will give Jean Coutu a 32 percent equity stake and 30.2 percent voting power in the expanded Rite Aid, making it the company's largest shareholder. In addition, Rite Aid will assume $850 million of long-term debt as part of the deal.
In the first year, Rite Aid plans to spend $500 million on the stores it is buying to remodel, remerchandise and convert their computer systems and signage to Rite Aid's, as well as another $450 million in the following four years, Sammons said.
"Every store will be touched in that first year, and some to a greater degree than others," she said.
Neil Stern, a drugstore analyst and senior partner with Chicago-based retail consulting firm, McMillan Doolittle LLP, said Rite Aid needed to make the purchase if it expected to keep up with the rapidly expanding CVS and Walgreen.
He also said the deal also builds on Rite Aid's strong markets in the Northeast.
"I think they clearly have the organizational strength to do this, and I think they have the financial wherewithal, assuming they get the support from Wall Street," Stern said.
Shares of the Camp Hill, Pa.-based Rite Aid fell 32 cents, or 6.8 percent, to close at $4.36 on the New York Stock Exchange.
Jean Coutu paid $2.38 billion for 1,539 Eckerd stores sold in 2004 by the retailer J.C. Penney Co.
The Rite Aid purchase has been approved by both companies' boards, but still requires a review by antitrust regulators and the approval of Rite Aid shareholders.
In a conference call with analysts, Lehman Brothers analyst Meredith Adler questioned whether the deal would pass muster with antitrust regulators because of the "significant overlap" in the location of the companies' stores.
Sammons would not speculate on how the proposed deal might fare with regulators. She also said that it was too early to say whether Rite Aid would close any stores until it does an analysis, but that some employees from Jean Coutu's U.S. headquarters in Warwick, R.I., would have to be let go.
The planned acquisition includes 1,858 drugstores - 337 Brooks stores and 1,521 Eckerd stores - and six distribution centers in 18 states, mostly on the East Coast from Maine to Georgia. About 70 percent of the stores being acquired are in states where Rite Aid currently operates, while the rest will introduce Rite Aid to Massachusetts, Rhode Island, South Carolina and North Carolina.
Upon closing, there will be about 5,000 Rite Aid stores in 31 states and Washington, D.C., with coverage on both the East and West coasts.
CVS Corp., based in Woonsocket, R.I., is currently the nation's leader with more than 6,100 drug stores. Deerfield, Ill.-based Walgreen Co., with about 5,400 stores, is the leader in annual revenue at $42.2 billion its latest fiscal year.
The combined fiscal 2006 revenue of Rite Aid and Jean Coutu's U.S. operations was approximately $26.8 billion.
Sammons will add chairman of the board to her duties, while Michel Coutu, currently president of Jean Coutu's U.S. operations, will become co-chairman of Rite Aid. Rite Aid's current chairman, Robert G. Miller, will continue to serve as a director.
Sammons' team took the reins of Rite Aid in December 1999 after the board forced out the previous management. They found the company to be $6 billion in debt, the seriousness of which was hidden for at least two years because of a $1.6 billion accounting falsification scheme that landed several former executives behind bars.
Rite Aid expects the latest deal will generate $150 million in savings and sees it adding earnings of 9 cents to 15 cents per share in the year after the deal closes.
The company said it could complete the deal as early as its fourth quarter, which ends March 3, 2007.
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AP Business Writer Jennifer Malloy in New York contributed to this story.
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On the Net:
Rite Aid Corp.: http://www.riteaid.com

HARRISBURG, Pa. - In a bold step to keep pace with the industry leaders, the nation's third largest drugstore chain, Rite Aid Corp., said Thursday it will purchase the U.S. Eckerd and Brooks operations of Canada's Jean Coutu Group Inc. for about $2.55 billion in cash and stock.<BR>
Rite Aid's first major acquisition since a turnaround team arrived to bring the company back from the brink of bankruptcy six years ago was designed to help it compete better with its bigger rivals Walgreen and CVS.<BR>
At the same time, Rite Aid said the deal will make it the largest drugstore chain operator on the East Coast and give it a larger presence in major cities such as Atlanta Philadelphia, New York and Baltimore.<BR>
"It accelerates so quickly our growth strategy," Rite Aid's president and CEO Mary Sammons said in a telephone interview. "These are good stores in good locations. . . . In terms of getting into the neighborhood, being where the customer is, you really want to have the scale that our leaders in the drugstore channel have."<BR>
Rite Aid will pay $1.45 billion in cash and 250 million shares valued at about $1.1 billion. The shares will give Jean Coutu a 32 percent equity stake and 30.2 percent voting power in the expanded Rite Aid, making it the company's largest shareholder. In addition, Rite Aid will assume $850 million of long-term debt as part of the deal.<BR>
In the first year, Rite Aid plans to spend $500 million on the stores it is buying to remodel, remerchandise and convert their computer systems and signage to Rite Aid's, as well as another $450 million in the following four years, Sammons said.<BR>
"Every store will be touched in that first year, and some to a greater degree than others," she said.<BR>
Neil Stern, a drugstore analyst and senior partner with Chicago-based retail consulting firm, McMillan Doolittle LLP, said Rite Aid needed to make the purchase if it expected to keep up with the rapidly expanding CVS and Walgreen.<BR>
He also said the deal also builds on Rite Aid's strong markets in the Northeast.<BR>
"I think they clearly have the organizational strength to do this, and I think they have the financial wherewithal, assuming they get the support from Wall Street," Stern said.<BR>
Shares of the Camp Hill, Pa.-based Rite Aid fell 32 cents, or 6.8 percent, to close at $4.36 on the New York Stock Exchange.<BR>
Jean Coutu paid $2.38 billion for 1,539 Eckerd stores sold in 2004 by the retailer J.C. Penney Co.<BR>
The Rite Aid purchase has been approved by both companies' boards, but still requires a review by antitrust regulators and the approval of Rite Aid shareholders.<BR>
In a conference call with analysts, Lehman Brothers analyst Meredith Adler questioned whether the deal would pass muster with antitrust regulators because of the "significant overlap" in the location of the companies' stores.<BR>
Sammons would not speculate on how the proposed deal might fare with regulators. She also said that it was too early to say whether Rite Aid would close any stores until it does an analysis, but that some employees from Jean Coutu's U.S. headquarters in Warwick, R.I., would have to be let go.<BR>
The planned acquisition includes 1,858 drugstores - 337 Brooks stores and 1,521 Eckerd stores - and six distribution centers in 18 states, mostly on the East Coast from Maine to Georgia. About 70 percent of the stores being acquired are in states where Rite Aid currently operates, while the rest will introduce Rite Aid to Massachusetts, Rhode Island, South Carolina and North Carolina.<BR>
Upon closing, there will be about 5,000 Rite Aid stores in 31 states and Washington, D.C., with coverage on both the East and West coasts.<BR>
CVS Corp., based in Woonsocket, R.I., is currently the nation's leader with more than 6,100 drug stores. Deerfield, Ill.-based Walgreen Co., with about 5,400 stores, is the leader in annual revenue at $42.2 billion its latest fiscal year.<BR>
The combined fiscal 2006 revenue of Rite Aid and Jean Coutu's U.S. operations was approximately $26.8 billion.<BR>
Sammons will add chairman of the board to her duties, while Michel Coutu, currently president of Jean Coutu's U.S. operations, will become co-chairman of Rite Aid. Rite Aid's current chairman, Robert G. Miller, will continue to serve as a director.<BR>
Sammons' team took the reins of Rite Aid in December 1999 after the board forced out the previous management. They found the company to be $6 billion in debt, the seriousness of which was hidden for at least two years because of a $1.6 billion accounting falsification scheme that landed several former executives behind bars.<BR>
Rite Aid expects the latest deal will generate $150 million in savings and sees it adding earnings of 9 cents to 15 cents per share in the year after the deal closes.<BR>
The company said it could complete the deal as early as its fourth quarter, which ends March 3, 2007.<BR>
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<I>AP Business Writer Jennifer Malloy in New York contributed to this story.<BR></i>
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<B>On the Net:</b>
Rite Aid Corp.: http://www.riteaid.com